Thursday, March 19, 2015

Do Minimum Wage Increases Cause Unemployment?

The minimum wage is a price floor, and it is binding in many locations. So we expect to see increases in the minimum wage being associated with reduced employment or increased unemployment.

Except that this has been remarkably hard to show in the data. The seminal paper here is Card and Krueger's 1994 piece entitled "Minimum Wages and Employment: A Case Study of the Fast-Food Industry In New Jersey and Pennsylvania". Their work found little effect of minimum wage increases on unemployment.

There have been many criticisms of this paper over the last 20 years, and it has taken some hits. But don't criticize it casually: Card and Krueger are major researchers from Princeton who published this in American Economic Review. Their results should not be taken lightly.

We talk a lot in here about the decline in labor force participation over the last 15 years or so. But that includes both the employed and the unemployed. No one is saying that changes in the minimum wage have significant effects on the opportunities of the already unemployed. So they focus on a slightly different statistic: the employment/population ratio rather than the (employment+unemployment)/population ratio. This too has fallen, although it peaked a little later (in April 2000). Here's what it looks like:
So, obviously, there's a big drop off with the Great Recession. And the government was increasing the minimum wage just before the peak, just after the peak, and in the middle of that big downward slide. Roughly, we're talking about a drop from 62.9% to 58.7%.

What they found was that about 1/6 of that big drop was due to the minimum wage increase. So that's far smaller than the changes produced by the demographics of aging baby boomers, which accounts for perhaps half of that big decline. But it's not nothing: it's about 1.4 million people who lost their jobs as a result of the three increases.

That's a big deal because far fewer people work for the minimum wage than is commonly recognized. Only about half the population actually works for wages (about 76 million). The rest work for salary, commission, piece-work, and so on. Of that 76 million, only 3.3 million worked at the minimum wage in 2013. So this is saying that would have been roughly 4.7 million without those minimum wage increases.

So what we have here is that 3.3 million people got a 40% increase, and 1.4 million got a 100% decrease in their wage.

It's not an easy ethical question to address whether that was worthwhile or not.

But, here's a thought experiment. The product of the 3.3 and the 40% is 1.32, which is roughly the same as the product of 1.4 and 100%. Thus, to an approximation, an increase in the minimum wage for workers who retain their jobs is paid for by completely cutting enough people to cover the difference. So, if you worked with 5 other people, would you vote to approve firing one of them at random, and splitting their wage to give everyone left a 25% increase? I wonder.